Budget 2014 Snapshot Key proposals for Financial Services Sector

Transcription

1 Budget 2014 Snapshot Key proposals for Financial Services Sector Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs No change in the income-tax rate, surcharge and education cess levy Basic exemption limit for individual tax payers (less than 60 years) increased to INR 0.25 million, and for resident individuals (60 80 years), increased to INR 0.30 million Limit of deduction under 80C of the Income-tax Act, 1961 (the Act) increased from INR 0.1 million to INR 0.15 million Limit of deduction for interest on housing loan for self occupied property increased from INR 0.15 million to INR 0.20 million Limit of deduction for contribution to notified Pension Funds under section 80CCD of the Act restricted to lower of 10 per cent of salary / gross total income or INR 0.10 million Combined limit for deduction under section 80C, 80CCC and 80CCD of the Act increased from INR 0.10 million to INR 0.15 million Individual can avail of beneficial tax treatment on long-term capital gains on purchase / construction of only one residential house in India In order to qualify as a long-term capital asset, period of holding for unlisted security and units of a mutual fund (other than units of an equity-oriented fund) to be increased from 12 months to 36 months Concessional tax rate of 15 per cent on dividends distributed by specified foreign subsidiary to Indian holding company to continue, without any sunset period Effective rate of Dividend Distribution Tax (DDT) has been increased as the DDT would be payable on the dividend amount including the DDT as against the levy on dividend amount Expenditure towards Corporate Social Responsibility required to be spent under the Companies Act, 2013, not to be treated as tax deductible Disallowance on account of non-deduction or non-payment of tax deducted at source on payments made to residents to be restricted to 30 per cent of amount of expenditure Time limit for completing withholding tax assessments for payments to residents extended upto seven years (from end of relevant Financial Year [FY]) 1

2 Budget 2014 Snapshot Indirect Taxes Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs High Level Committee to be constituted by Central Board of Direct Taxes (CBDT) to interact with trade and industry bodies to identify areas which require clarity on tax issues and issue appropriate clarifications within two months Government to consider comments received from stakeholders on Direct Taxes Code (DTC) and to take a view regarding its enactment With a view to reduce litigation, Finance Minister announced extension of advance ruling provisions to resident tax payers; no enabling provisions introduced to this effect Key transfer pricing proposals Enhancement of Advance Pricing Arrangement (APA) programme: - Roll back mechanism introduced; APAs which could earlier apply from FY onwards may now extend to preceding four years i.e. FY onwards - APA team to be strengthened to expedite disposals Range concept introduced instead of arithmetic mean to determine arm slength price Use of data of multiple years for comparability analysis to be accepted Transactions with a domestic unrelated party clarified to be covered as an international transaction, subject to satisfaction of prescribed conditions 2

3 Budget 2014 Snapshot Indirect Taxes Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs Key indirect tax proposals Finance Minister assured that pending issues for introduction of Goods and Service Tax to be resolved during the financial year No change in service tax rate Variable rate of interest (18 per cent to 30 per cent per annum) for delayed payment prescribed from 1 October 2014 Rules for determining rate of exchange for taxable value to be prescribed Advance ruling provisions extended to resident private limited companies Reverse charge mechanism extended to services provided by director to a body corporate Amendment in Place of Provision of Services (POPS) Rules: - Definition of Intermediary expanded to include goods - POPS for services of hiring of vessels (excluding yachts) and aircrafts would be location of service recipient Mandatory pre-deposit of 7.5 per cent/10 per cent of tax for filing appeals, subject to ceiling of INR 100 million CENVAT Credit on inputs and input services needs to be availed within 6 months from the date of issue of invoice Mandatory e-payment of service tax 3

4 Budget 2014 Snapshot Banking & Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs Key policy announcements Banking Government to set up modern monetary policy framework in consultation with the Reserve Bank of India (RBI) Indian companies to adopt New Indian Accounting Standards (IAS) from Financial Year (FY) on a voluntary basis, and from FY on a mandatory basis. For banks, RBI to separately notify date of IAS implementation To meet Basel III capital requirements, follow-on public offer of Public Sector Banks (PSBs) to be undertaken Financial sector regulator to take steps to develop a vibrant, deep and liquid corporate debt market and deepen currency derivative market by eliminating restrictions International settlement of Indian debt to be permitted Introduction of single operating demat account for transactions in all financial assets Proposal to provide greater autonomy to banks to be considered Government to consider suggestions concerning consolidation of PSBs Banks encouraged to provide long-term financing with flexible structures to infrastructure sector; on the liability side, long-term borrowings for infrastructure lending to be subject to minimum regulatory pre-emption Structure to be put in place for on-tap licensing of universal banks in the private sector; licensing framework to be created for small banks and differentiated banks (such as payments banks) To address the issue of rising NPAs in PSBs, 6 new Debt Recovery Tribunals proposed 4

5 Budget 2014 Snapshot Banking & Direct Taxes Indirect Taxes FIIs/ FPIs Mutual Funds Private Equity & VCs Banking Tax withholding at concessional rate of 5 per cent on interest on foreign currency loans extended till 1 July Concession extended to any longterm bonds (not limited to long-term infrastructure bonds) issued in foreign currency New statement of financial transaction or reportable account to replace Annual Information Return. Reporting requirement extended to a generic category of 'prescribed reporting financial institution' Key indirect tax proposals Banking and Reverse charge mechanism extended to recovery agent services provided to banks, NBFCs and other financial institutions Concept of intermediary extended to goods. Intermediary covers brokers, agents or any other person who arranges or facilitates a transaction Loss incurred on trading in shares of companies with principal business of trading in shares excluded from the purview of speculation business Eligible transaction of trading in commodity derivatives carried out on recognised association, which is chargeable to Commodities Transaction Tax, not deemed to be speculative Securitisation trusts required to file a return of income 5

6 Budget 2014 Snapshot FPIs Direct Taxes Indirect Taxes FIIs/ FPIs Mutual Funds Private Equity & VCs Key policy announcements Indian Depository Receipt framework to be revamped American Depository Receipt /Global Depository Receipt regime to be liberalised for allowing issuance of depository receipts on all permissible securities International settlement of Indian debt to be permitted Measures to be taken for introduction of uniform KYC norms and interusability of the KYC records across the entire financial sector Introduction of single operating demat account for transacting in all financial assets No deferral of General Anti-Avoidance Rules (GAAR) No change in rules for retrospective taxation; all fresh cases arising out of retrospective indirect transfer amendment to be scrutinised by a High Level Committee constituted by the CBDT before any action is initiated in such cases To provide certainty on characterisation of income of Foreign Institutional / Portfolio Investors (FPIs), income arising from transaction in securities (including derivatives) to be characterised as Capital Gains In order to qualify as a long-term capital asset, period of holding for unlisted security and units of a mutual fund (other than units of an equity oriented fund) to be increased from 12 months to 36 months Transfer of Government securities (carrying a periodic payment of interest), between two non-residents, through an intermediary dealing in settlement of securities not a taxable transfer and thereby exempt from capital gains tax 6

7 Budget 2014 Snapshot Mutual Funds Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs With effect from 1 October 2014, additional tax on income distributed to unit-holders to be levied on income distribution amount including such additional tax, as against levy on income distributed Effective tax rates :- Nature of income Existing effective tax rate* (In percentage) Proposed effective tax rate* (In percentage) Long-term capital gains tax rate on transfer of units of a mutual fund increased from 10 per cent to 20 per cent (this would largely be relevant in the context of funds other than equity-oriented funds) Mutual Funds required to file a return of income; Mutual Funds no longer required to file statement furnishing particulars of income distributed Income distributed by a fund to individuals and HUFs /39.52# Income distributed by a fund to persons other than Individuals and HUFs /51.49# Income distributed by infrastructure debt fund to non-residents /6.01# In order to qualify as a long-term capital asset, period of holding for unlisted security and units of a mutual fund (other than units of an equity oriented fund) to be increased from 12 months to 36 months * Inclusive of surcharge at the rate of 10 per cent and education cess at the rate of 3 per cent # Tax rates grossed up together with surcharge and education cess 7

8 Budget 2014 Snapshot Private Equity and Venture Capitals Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs Key policy announcements Composite cap on Foreign Direct Investment (FDI) in insurance and defence sector proposed to be raised to 49 per cent with full Indian management and control, under Government permission route (FIPB approval) Retrospective provisions relating to overseas transfer of an asset deriving its value substantially from assets located in India not repealed All fresh cases are to be scrutinised by a high-level committee of Central Board of Direct Taxes, before initiating any action In order to qualify as a long-term capital asset, period of holding for unlisted security and units of a mutual fund (other than units of an equity oriented fund) to be increased from 12 months to 36 months Tax withholding at concessional rate of 5 per cent on interest on foreign currency loans extended till 1 July Concession extended to any longterm bonds (not limited to long-term infrastructure bonds) issued in foreign currency Advance received in the course of negotiation of a transfer of a capital asset, subsequently forfeited, where the transaction does not go through, now taxable as income from other sources Effective rate of DDT has been increased as the DDT would be payable on the dividend amount including the DDT as against the levy on dividend amount Venture Capital Company / Venture Capital Fund are required to file return of income 8

9 Budget 2014 Snapshot Real Estate Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs Key policy announcements Proposal to develop 100 Smart Cities as satellite towns of larger cities Project/investment-linked conditions for FDI in construction development projects have been liberalised: Minimum built-up area requirement reduced from 50,000 sq. mtrs. to 20,000 sq. mtrs. Minimum capitalisation requirement of USD 10 million for whollyowned subsidiary reduced to USD 5 million Project with at least 30 per cent of the total project cost allocated for low cost affordable housing not to be subject to limitations of minimum built-up area and capitalisation requirements Role of National Housing Bank enhanced to include: Promotion of cheaper lending for low cost affordable housing Promotion of rural housing Tax holiday period for power sector entities that begin generation, distribution and transmission of power extended from 31 March 2014 to 31 March 2017 Tax withholding at concessional rate of 5 per cent on interest on foreign currency loans extended till 1 July Concession extended to any longterm bonds (not limited to long-term infrastructure bonds) issued in foreign currency Deduction for interest on loan on self-occupied property increased from INR 0.15 million to INR 0.20 million Pass-through status not extended to real estate and infrastructure dedicated Alternative Investment Funds No deferral of GAAR REIT / InvIT tax regime explained in next slide Slum development to qualify as Corporate Social Responsibility activity Special Economic Zones (SEZ) to be revived; no changes in tax regime for SEZ units / developers proposed Concept of Infrastructure Investment Trusts (InvIT) introduced; to be in line with Real Estate Investment Trusts (REITs) Scheme for development of new airports in Tier I and Tier II cities to be launched for implementation through Airport Authority of India or PPPs Funds allocated to National Highway Authority of India for construction of roads 9

10 Budget 2014 Snapshot Real Estate Direct Taxes Indirect Taxes FIIs / FPIs Mutual Funds Private Equity & VCs Typical REIT /InvIT structure Sponsor 1 Transfer of shares of SPV Units REIT /InvIT (Business Trust) SPV 1 Shares Investors Specific tax regime for Real Estate Investment Trust (REIT) / Infrastructure Investment Trust (InvIT) w.e.f. 1 October 2014 Particulars Capital gains arising to Sponsor on exchange of shares in Special Purpose Vehicle (SPV) with units of Business Trust Capital gains on transfer of units held in Business Trust Dividend income of Business Trust Taxability Tax liability deferred to the time of disposal of units by Sponsor - Holding period of shares to be included in holding period of units - Cost of acquisition of shares of SPV to be considered as cost of acquisition of units - Preferential capital gains regime (as explained in [2] below) not applicable where such units are sold by Sponsor - Securities Transaction Tax applicable to transfer of units of Business Trust similar to equity shares traded on a stock exchange - Long-term capital gains to be exempt from tax - Short-term capital gains taxable at 15 per cent (plus applicable surcharge and cess) - Dividend distribution tax (DDT) applicable at SPV level - Dividend income exempt from tax in hands of Business Trust - Onward distribution of amount attributable to dividend by Business Trust to investors to be exempt Interest income of Business Trust - Accorded pass-through treatment (no taxation at Business Trust level) 4 - No tax withholding at SPV level - Business Trust to withhold tax on distribution attributable to the interest component - Domestic unit holders at 10 per cent / Non-resident unit holders at 5 per cent - Taxes withheld for non-resident unit-holders to be their effective tax liability Commercial asset Capital gains on disposal of shares in SPV 5 Any other income of Business Trust Interest on loans taken by Business Trust - Taxable as Capital Gains (assuming shares in SPV are held as capital asset by Business Trust) - Onward distribution of amount attributable to capital gains exempt in hands of unit holders - Taxable at maximum marginal rate (for example: Income from commercial assets held directly) - Business Trust to withhold tax at the rate of 5 per cent 10

11 Budget 2014 Snapshot Insurance Direct Taxes Indirect Taxes FIIs/ FPIs Mutual Funds Private Equity & VCs Key policy announcements Composite cap for FDI in insurance sector to be increased from 26 per cent to 49 per cent, with full Indian management and control, under Government permission route (FIPB approval) Parliament to take up Insurance laws (Amendment) Bill for consideration immediately New Indian accounting standards to apply to insurance companies from a date to be notified by the IRDA based on international consensus With effect from 1 October 2014, tax to be withheld at the rate of 2 per cent on any sum (including bonus) payable to a resident under a life insurance policy which does not qualify for exemption under section 10(10D) of the Act Tax not required to be deducted where such sum or aggregate of such sums payable during the financial year is less than INR 0.1 million Key indirect tax proposals Service tax exemption presently available for specified micro insurance schemes expanded to cover all life micro insurance schemes (approved by IRDA) where the sum assured does not exceed INR 0.05 million per life insured 11

12 Contacts Gautam Mehra, Mumbai Vikram Bohra, Mumbai Satish S, Mumbai Nitin Karve, Mumbai Anish Sanghvi, Mumbai Dharmesh Panchal, Mumbai Suresh V Swamy, Mumbai suresh.v.swamy@in.pwc.com Shinjini Kumar, Mumbai shinjini.kumar@in.pwc.com Sunil Gidwani, Mumbai sunil.gidwani@in.pwc.com Dhaivat Anjaria, Mumbai dhaivat.anjaria@in.pwc.com This publication does not constitute professional advice. The information in this publication has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PL) to be reliable but PL does not represent that this information is accurate or complete. Any opinions or estimates contained in this publication represent the judgment of PL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take PricewaterhouseCoopers Private Limited. All rights reserved. In this document, refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (IL), each member firm of which is a separate legal entity.